Costly Financing Only Choice for Most Small Firms

By Emily Maltby

New research sheds some light on the number of business owners that don’t qualify for bank loans – and the high price they would have to pay to get financing elsewhere.

To be sure, the research isn’t highly scientific. It was conducted by MultiFunding LLC, a start-up in Broad Axe, Penn., that helps small companies locate financing and submit loan applications.

But the findings offer some perspective on the state of small-business credit. Less than a third of owners would qualify for traditional or Small Business Administration-backed loans, which cost roughly 3% to 8% in interest and fees. More than half, or 57%, would need to seek financing through alternative means, such as factoring, merchant cash-advances or unsecured lines of credit, which can cost upwards of 20%. (The remaining 15% wouldn’t be eligible for any type of financing.)

When the firm looked at how much owners would likely be charged for financing, it found that about 40% of owners would pay more than 23% in annual interest and charges, and 21% of owners would pay more than 30%.

The poll takes into consideration the creditworthiness, cash flow and collateral of 250 owners, all of whom are MultiFunding clients. But Ami Kassar, MultiFunding’s chief executive, says it ” adds an element to the debate” about the small-business lending environment – a debate full of contradicting reportsand hard-to-nail indicators.

This survey also skews to the smallest businesses. The average annual revenue of the surveyed companies is $750,000 and the average time in business is three years. More than a quarter have already been rejected by banks.

Comments (3 of 3)

The problem is that no one is coaching business owners on business credit techniques. You wouldn't apply for a home mortgage if you had mistakes on your credit report that were costing you, right? You'd fix them first, then apply. We have yet to have someone complete our business credit program that hasn't qualified for lender financing. Perhaps the banks should start some business credit building seminars if they want to lend more money.

7:08 am May 9, 2011

Wayne Spivak wrote :

The day of the Banker knowing the customer is long gone. Now banks, lenders of all stratas use impersonal and quite frankly error ridden data to determine whether or not a company is credit worthy by interrelating that ability of a company to the individuals who own their own company.

How many times do you here the tail of the consummate business professional who is a personal disaster or the person who has their life together, but can't make a business decision.

80% of all businesses in this country are small (a floating definition, no doubt) but Banks and other lenders need to re-think the business model, it isn't working.

If a proprietor has a history of making payments on time, has experience in his/her business and newly self-employed, then education and experience should play a greater factor. Looking solely at a borrower's FICO score is a mistake. This is the market which will create more of the jobs we need to sustain a recovery. Lenders, find good quality, self-employed people and loan money to them!

About In Charge

America’s entrepeneurs are executives who build companies from the ground up. In Charge provides news, analysis and in-the-trenches commentary about small-business management. Produced by Sarah E. Needleman, Emily Maltby and Angus Loten, with contributions from the Wall Street Journal staff and others. Have a comment or tip? Write to incharge@wsj.com.